Average mortgage rates
continue to hover near historic lows, but with all signs pointing to
interest rates rising in the near future, you may be asking yourself, “Should I refinance my home?”
Here are 5 signs that locking in a lower mortgage rate now could be the right move.
1. You can break even quickly
To calculate the breakeven on a mortgage refinance,
divide what it costs to refinance (e.g., origination fees, closing
costs, etc.) by the amount you’ll be saving each month. For example,
refinancing a 30-year $1 million loan from 7.5 to 4.5 percent would
result in savings of $1,925 per month. If the cost of the refi is
$20,000, the amount of time it would take to break even would be just
over 10 months ($20,000 / $1,925 = 10.39).
A quick tip – origination fees are usually the single highest cost in a mortgage refinance. By working with a lender that doesn’t charge origination and other closing fees, you can reduce the cost of the refinance and the amount of time it takes to break even.
2. You can reduce the rate on your home by at least .5 percent
Historically, the rule of thumb was that home refinance rates
had to be a minimum of two percent lower than the existing mortgage.
However, the combination of larger mortgages and lower closing costs has
changed all that. For a jumbo mortgage, even a change of .5 percent can
result in significant savings and a short time to break even,
especially if you can avoid lender fees.
3. You can afford to refinance to a 15-year mortgage
Shortening the term of your mortgage
from 30 years to 15 years will likely cost more on a monthly basis, but
it can save thousands of dollars (or more) over the life of the loan.
For example, a 30-year $1 million loan at a 7.5 interest rate would
carry a monthly payment of $6,992 and a total cost of $2,517,120 over
the life of the loan. Refinancing to a 15-year mortgage with a 5.5
percent rate would result in a higher monthly payment of $8,171, but the
shorter maturity results in a total payoff of $1,470,780 – a savings of over a million dollars versus the 30-year loan.
4. The interest on your adjustable rate mortgage (ARM) is headed higher
ARMs have saved borrowers money with
lower interest rates versus fixed loans since 2008. However, for almost a
year now, the Fed has been hinting that it is prepared to start
increasing its benchmark interest rate. Refinancing to a fixed mortgage
in this environment can protect you against rate increases and provide
the security of knowing how much you’ll be paying on your mortgage each
month – no matter what rates do next.
5. You can do a “cash-out” refinance and use the money to pay off other debts
Tapping the equity in your home can
become problematic if not used responsibly, so you have to be careful
with this one. But this move makes a lot of sense if you can pay off
debts carrying higher percentage rates, since lower interest rates will
allow for faster repayment of consolidated debt balances and also gets
you that mortgage interest deduction.
The Takeaway
A mortgage refinance
can be a great move that saves money on a monthly basis and/or over the
life of the loan. More than just saving money, however, locking in a
lower rate now can help you achieve your long-term goals. Once you’ve
decided that refinancing your home is the right move, look for a lender
that’s offering competitive rates and low or no fees – then let the
refinance do the money-saving work for you.
Thinking about refinancing? Skip the headaches by refinancing with SoFi. See your rates and monthly savings in two minutes. Get started today.
